ACCA REVISION MOCK

Performance Management

December 2012

QUESTION PAPER

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Writing time: 3 hours

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Kaplan Publishing/Kaplan Financial

Pape

r F5

ACCA F5 PERFORMANCE MANAGEMENT

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© Kaplan Financial Limited, 2012

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All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.

REVISION MOCK QUESTIONS

KAPLAN PUBLISHING 3

FORMULAE

Learning curve

Y = axb

Where y = average cost per batch

a = cost of first batch

x = total number of batches produced

b = learning factor (log LR/log 2)

LR = the learning rate as a decimal

Regression analysis

y = a + bx

b = 22 x)(–xnyx–xyn

∑∑

∑∑∑

a = n

xbn

y ∑–∑

r = )y)(–y(n )x)(–xn

yx–xyn2222 ∑∑∑∑

∑∑∑

Demand curve

P = a − bQ

b = quantity in Change

price in Change

a = price when Q = 0

MR = a –2bQ

ACCA F5 PERFORMANCE MANAGEMENT

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Answer ALL questions

1 You work in the Finance department at the Commerce Bank Ltd. Your manager, Mr MacDonald, has been to a business seminar where he has heard that ‘throughput accounting is the most modern costing technique and can hugely increase profitability’. He asks you to prepare a briefing note for him on this technique.

Required:

(a) Outline the principles of Throughput Accounting (Theory of Constraints) and explain the step-by-step process that would be used to maximise profits in a multi-product business. (11 marks)

(b) Define and explain the Throughput Accounting Ratio (TPAR) measure. (3 marks)

(c) Outline the possible benefits and drawbacks associated with the adoption of a system of throughput accounting. (4 marks)

(d) State whether you consider a throughput accounting system would be appropriate for the Commerce Bank Ltd, giving your reason. (2 marks)

(Total: 20 marks)

2 Butterfield Ltd manufactures a single brand of dog-food called 'Lots O' Grissle' (LOG). Sales have stabilised for several years at a level of $20 million per annum at current prices. This level is not expected to change in the foreseeable future (except as indicated below). It is well below the capacity of the plant. The managing director, Mr Rover, is considering how to stimulate growth in the company's turnover and profits. After rejecting all of the alternative possibilities that he can imagine, or that have been suggested to him, he is reviewing a proposal to introduce a new luxury dog-food product. It would be called 'Before Eight Mince' (BEM), and would have a recommended retail price of 50c per tin. It would require no new investment, and would incur no additional fixed costs. Mr Rover has decided that he will undertake this new development only if he can anticipate that it will at least break-even in the first year of operation.

Mr Rover estimates that BEM has a 75% chance of gaining acceptance in the market-place. His best estimate is that if the product gains acceptance it will have sales in 20X1 of $3.2 million at retail prices, giving a contribution of $1 million after meeting the variable costs of manufacture and distribution. If, on the other hand, the produce fails to gain acceptance, sales in 20X1 will, he thinks, be only $800,000 at retail prices, and for various reasons there would be a negative contribution of $400,000 in that year.

Required:

(a) Show whether, on the basis of these preliminary estimates and with the use of Expected Values, Mr Rover should give the BEM project further consideration. (4 marks)

Mr Rover discusses the new project informally with his sales director, Mr Hound, who suggests that some of the sales achieved for the new product would cause lost sales of LOG. In terms of retail values he estimates the likelihood of this as follows:

There is a 50% chance that sales of LOG will fall by half of the sales of BEM, resulting in a loss of contribution of $0.4 m if the product gains acceptance and a loss of contribution of $0.1m if it doesn't gain acceptance;

REVISION MOCK QUESTIONS

KAPLAN PUBLISHING 5

There is a 25% chance that sales of LOG will fall by one-quarter of the sales of BEM, resulting in a loss of contribution of $0.2 m if the product gains acceptance and a loss of contribution of $0.0.5 if it doesn't gain acceptance;

There is a 25% chance that sales of LOG will fall by three-quarters of the sales of BEM, resulting in a loss of contribution of $0.6 m if the product gains acceptance and a loss of contribution of $0.15m if it doesn't gain acceptance;

Required:

(b) Draw a decision tree and calculate the Expected Value of overall contribution if BEM is launched. Conclude whether Mr Rover give the BEM project further consideration. (9 marks)

Butterfield could pay $100,000 for market research which will tell them with complete accuracy whether or not BEM will gain market acceptance. Assuming the EV calculated in part (b) was $325,000, calculate the value of this Perfect Information and advise whether the research should be commissioned.

Required: (c) Show whether Mr Rover should carry out the market research proposals. (7 marks)

(Total: 20 marks)

Possible extension work

Preliminary discussions with the market research company suggest that its forecast will not be entirely reliable. They believe that, if they indicate that BEM will gain acceptance, there is only a 90% chance that they will be right; and, if they indicate failure to gain acceptance, there is only a 70% chance that they will be right. This implies a 75% chance overall that the market research company will indicate acceptance, in line with Mr Rover's estimate.

Required:

(d) Show the maximum amount that Mr Rover should be prepared to pay the company to undertake the market research, given the new estimates of the reliability of their advice. (9 marks)

(e) Outline briefly the strengths and limitations of your methods of analysis in (a) to (d) above. (5 marks)

3 Banana Ltd manufactures and sells computers. It is investigating the financial viability of a new product ‘the Leaf.’ The Leaf is a laptop computer and, if launched, it will be the thinnest laptop available on the market. Initial design, development, production set-up and marketing costs have been significant. However, if the product is launched, direct labour costs will decrease over time. The product is only expected to have a life of 18 months, due to the highly competitive and fast moving nature of the industry. The following estimated information is available for the Leaf:

1 Sales should be 1,400 units in the 18 month period. The company establishes the selling price by calculating the cost per unit and adding a 25% mark-up.

2 A 75% learning curve will apply for the first 900 units after which a steady state production time will apply. The labour time per unit after the first 900 units will be equal to the time for the 900th unit. The cost of the first unit was measured at $5,000. This was for 500 hours at $10 per hour.

3 The variable overhead is estimated at $3 per labour hour.

ACCA F5 PERFORMANCE MANAGEMENT

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4 Direct material will be $600 per unit for the first 300 units produced. The second 300 units will cost 80% of the cost per unit of the first 300 units. All units from then on will cost 80% of the unit cost for each of the second 300 units.

5 The Leaf will require additional machines and factory space to be rented, at a fixed cost of $11,000 per month.

Note: The learning curve formula is given on the formulae sheet. At the learning rate of 0.75 (75%), the learning factor (b) is equal to –0.4150.

Required:

(a) Explain the impact of the learning effect on budgeting in Banana Ltd. (2 marks)

(b) What is the minimum price per unit that the company should quote for each Leaf, so as to hit their target profit mark-up of 25%? Ignore any design, development, set-up and marketing costs. (10 marks)

(c) Discuss the relevance of the learning curve in a modern manufacturing environment, such as that found in Banana Ltd. (4 marks)

(d) Discuss how life cycle costing could be applied to Banana Ltd. (4 marks)

(Total: 20 marks)

4 The Jolly Fish Company Ltd (JFC) manufactures speciality fish pies, which it sells in bulk to delicatessen shops. The only variable cost is raw material, which consists mainly of three types of raw fish as well as other lower value ingredients. The standard cost of the raw fish used in the manufacture of each 100 kgs of speciality fish pie is as follows: Raw material Kilograms Standard price per kilogram Type A 25 $2 Type B 60 $3 Type C 40 $4 Total input 125 Normal loss 20% of input (25) Output 100

In preparing its budget for 2011, JFC assumed that there would be a market in the UK for 125,000 kilograms of fish pie, and that JFC’s product would have a 40% share of its market. The budget also assumed a selling price of $6 per kilogram for JFC’s product.

However, during 2011, JFC and its competitors were adversely affected by diminishing consumer confidence in fish products after a rumour about high levels of mercury making seafood unsafe. The actual total market size was only 110,000 kilograms of fish pie and JFC sold only 33,000 kilograms of its product.

JFC’s managing director recently explained how his company attempted to respond to the difficulties it faced in 2011 : ‘First, we reduced our selling price from $6 to $5.90 per kg; this was a modest price reduction in comparison with those of our smaller competitors. Second, we took advantage of falling market prices for some of the types of fish we use a raw material for our product. With benefit of hindsight, we should perhaps have done more to increase consumers’ confidence in the safety of fish products in general and our own product in particular.’

REVISION MOCK QUESTIONS

KAPLAN PUBLISHING 7

The actual raw materials used by JFC in 2011 were as follows:

Raw material Kilograms Actual price per kilogram Type A 8,800 $1.70 Type B 19,200 $3 Type C 12,000 $4 Total 40,000 JFC never keeps any opening or closing inventory of its raw materials or finished products.

Required:

(a) Calculate the following variances for JF’s Ltd:

(i) Raw materials price

(ii) Raw materials mix

(iii) Raw materials yield

(iv) Sales price

(v) Sales volume (11 marks)

(b) Break down the sales volume variance into market share and market size variances. (3 marks)

(c) Critically evaluate the performance of the JFC company in 2011, supporting your answer by reference to the variances you have calculated. (6 marks)

(Total: 20 marks)

5 Rosca Coffee Company operates a chain of coffee shops which are located in prime high street locations, motorway service stations, railway stations and airports. The company has expanded rapidly since its first shop was opened five years ago, taking advantage of the growing consumer demand for this product. The business offers a wide range of coffees and also serves pastries, cakes and sandwiches. Rosca Coffee has taken the lead from some of its competitors and has a number of contracts with large businesses which involve catering from breakfast and afternoon meetings. These businesses are offered a credit period by Rosca Coffee.

The business if facing a growing amount of competition and an economic downturn is predicted. As a result, Rosca Coffee would like to carry out a full financial and non-financial review in order to ensure that the company’s success to date is maintained. The following financial information is available:

Current year ($000)

Previous year ($000)

Sales revenue 3,670.1 3,001.2 Gross profit 975.3 744.4 Net profit 622.7 457.4 Inventory 296.5 175.3 Trade receivables 744.1 642.5 Trade payables 552.7 402.3 Cash 1,060.7 884.4 Other current liabilities 566.9 604.3 Finance cost 406.4 354.5

ACCA F5 PERFORMANCE MANAGEMENT

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Some industry average ratios for the current year are as follows:

Current ratio 1.6 Quick ratio 1.5 Receivables collection period 90 days Payables payment period 60 days Interest cover 1.1 times Gross profit margin 22.4% Net profit margin 13.4%

An extract from the company’s balanced scorecard is included below:

Current year Previous year Customer perspective: Number of customers 1,243,000 912,000 % of customers who complained 17% 8% % returning customers 43% 64% Internal perspective: Time between taking order and customer receiving their order

11 minutes 3 minutes

Staff turnover per year 33% 11% Innovation and learning: % of staff time spent on training 2% 10% % of revenue from new products 2% 33%

Required:

(a) Using the information given, comment on the financial performance of Rosca Coffee. (9 marks)

(b) Explain why the non-financial information is likely to give a better indication of the future success of the company than the financial information. (4 marks)

(c) Using the information given, comment on the non-financial performance of the business in terms of customer, internal and the innovation and learning perspective. (7 marks)

(Total: 20 marks)